Use

The market price calculator for swaps calculates current market values, time values, and future market values (the future point in time is the horizon).

Swaps are agreements to exchange fixed and/or variable interest rates. Their individual variations can take almost any form. In addition to interest swaps (one transaction currency), you can also compose currency and cross-currency interest rate swaps (two transaction currencies). A principal swap can be processed at the beginning and/or the end of the validity period. Because condition items can be arranged variably, interest rate agreements can be arranged any way you like. In addition to fixed-rate payer and receiver swaps (exchange of fixed rates for variable), you can also perform basis swaps (exchange of variable interest rates calculated on different bases). Even interest rate agreements in which interest rates dependent on formulae can be used to some extent (using variable interest rates). The formula must be in the form V ₁ V ₂ + V ₃ V ₄ (where V _i is a fixed or variable interest rate). You can also work with fixed or variable interest rate floors and caps. For valuation, the interest rates which go above or below the agreed interest rate limit are replaced with the values of that limit. You can also create amortization and step-up swaps. Variable interest rate spreads can also be arranged as you choose. The frequency of interest payments can be freely adjusted as well.

Integration / Calculation Basis

In order to value a swap, the transaction data, and alternatively a par coupon or zero coupon yield curve in the transaction currency, has to be entered for the evaluation date. In addition to the yield curves necessary for discounting generated cash flows, it is possible that additional yield curves are needed to calculate forward interest rates for variable interest payments.

With the help of the Treasury Management component, a cash flow is generated for each side of the swap when a swap is created. The cash flow consists of interest and principal payments, which "flow" at particular points in time. The amount of the interest payments is known for fixed interest rates. Only the reference interest rate is known for variable interest rates (perhaps contained in formulae and interest caps and floors).

Zero bond discounting factors are needed as further input parameters in order to discount the cash flow. The zero and par coupon calculation methods can be used to define the zero bond discounting factors.

If the transaction currency differs from the display currency of the swap, the transaction currency is changed into the display currency using the currency rate from the horizon. If the horizon is later than the evaluation date, the corresponding forward currency rate is calculated for the evaluation date using the yield curves from the transaction and display currencies.

The following function modules, among other things, are used in calculating the input parameters:

Scope of Functions / Valuation

In the first step, the cash flow is reduced to those flows which have due dates later than the horizon. For swaps with variable interest payments (on one or both sides), the forward reference interest rates are then calculated. For interest rate agreements whose fixed and variable interest rates are tied to formulae, the amount of the resulting interest rates is calculated using the calculated forward rates (possibly taking interest floors and caps into consideration). The calculated interest payments are put into the cash flow, which only contains flows whose size and payment date are certain.

Depending on the method of calculation (par or zero coupon method), the NPV of the individual cash flows (both sides) is calculated for the horizon, using the yield curve of the transaction currency. The value of both sides of the swap (in the transaction currency) is the sum of the NPVs of the cash flows (from both sides). The NPV of the swap (in the display currency) is the difference between the value of the two sides of the swap, the value having been converted to the display currency using the (forward) currency rates.

The following abbreviations/definitions are used:

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